EU upgrades growth forecast, sees recovery gaining ground

The Euro logo in front of the European Central Bank (ECB) in Frankfurt The European Union upgraded its economic forecasts Tuesday, betting that a modest recovery is now sustainable as member states push ahead with reforms. The 18-nation eurozone should grow 1.2 percent this year and 1.8 percent in 2015, slightly up from previous estimates given in November for 1.1 percent and 1.7 percent, the European Commission said.
Similarly, the full 28-member EU will expand 1.5 percent this year and 2.0 percent in 2015, also both revised up by 0.1 percentage point.
"Recovery is gaining ground in Europe.... Rebalancing of the European economy has been progressing and external competitiveness is improving," EU Economic Affairs Commissioner Olli Rehn said.
"The worst of the crisis may now be behind us, but this is not an invitation to be complacent as the recovery is still modest," Rehn said.
"To make the recovery stronger and create more jobs, we need to stay the course of economic reform."
The eurozone escaped a record 18-month recession in second quarter 2013 and after "three consecutive quarters of subdued recovery, the outlook is for a moderate step-up in economic growth," the Commission said in its Winter forecasts report.
Among member states, European powerhouse Germany should post growth of 1.8 percent this year, rising to 2.0 percent in 2015, slightly better than November's estimates, while struggling France will pick up slightly to 1.0 percent but is flat at 1.7 percent for next year.
Twice-bailed out Greece is expected to escape six years in deep recession with growth of 0.6 percent and then 2.9 percent while Italy will expand 0.6 percent and 1.2 percent as Spain does better with 1.0 percent and 1.7 percent.
Non-euro Britain, however, easily out-distances its eurozone peers with gains of 2.5 percent and 2.4 percent this year and next.
For comparison. the US economy is expected to grow 2.9 percent this year and 3.2 percent in 2015.
- Reforms must continue -
The Commission stressed that growth depends on continued commitment to economic reforms and sound fiscal policy.
The "largest downside risk... is a renewed loss of confidence that could stem from a stalling of reforms at national or European level," the Commission said.
Noting very low inflation, the Commission conceded it could "entail risks to the rebalancing of the economy" but believed there was "only a marginal probability of shocks large enough to de-anchor inflation expectations and initiate EU-wide deflation".
Inflation has been falling steadily in recent months -- it hit 0.8 percent in January, way below the European Central Bank's 2.0 percent target -- reflecting very weak consumer demand and sparking concerns of deflation, when prices fall in real terms.
In deflation, consumers put off purchases to a later date when they expect them to be cheaper but this leads companies to cut investment, hitting salaries and jobs, and in turn, undercuts demand further.
The Commission said offsetting this risk, the recovery could be stronger than expected, especially if "further bold structural reforms are implemented".
On this basis, the Commission estimated 2014 eurozone inflation at 1.0 percent, rising to 1.3 percent in 2015 and compared with its previous estimates for 1.5 percent and 1.4 percent.
For unemployment, currently running at near record highs around 12 percent, it saw no change this year at 12 percent and an improvement next year to 11.7 percent, better than November's figures.
Member state finances which have suffered huge strain during the debt crisis show signs of stabilising, the Commission said, but much remains to be done.
The average eurozone public deficit -- the shortfall between government revenues and spending -- is expected at 2.6 percent of Gross Domestic Product this year and to improve to 2.5 percent in 2015, well below the EU 3.0 percent limit.
But that is still slightly worse that the previous estimates of 2.5 percent and 2.4 percent.
Total accumulated debt is expected to show little improvement at 95.9 percent and 95.4 percent this year and next, still way over the 60 percent limit.
While Germany again leads the field with a zero public deficit forecast for the two years, France falls badly short of targets agreed with the Commission to stabilise its finances at the 3.0 percent ceiling, coming in at 4.0 percent and 3.9 percent.
Spain's deficit this year should improve to 5.8 percent from 7.2 percent for 2013 but then slips back again to 6.5 percent next year, the Commission said.
Greece, however, which is locked in difficult talks with its international creditors over its reform commitments and future funding needs, should return to positive territory at 1.0 percent in 2015, after a deficit of 2.2 percent this year and 13.1 percent in 2013.
Source: AFP